Nguyễn Thái Thanh – Introduction to Macro Economics – Final

MONEY GROWTH AND INFLATION

P: Price level (CPI or GDP Deflator), measured in money [basket of goods].
1/P: Value of money.

E.g: $1 buy 1 → The value of $1 is 1

$2 buy 1 → The value of $1 buy ½

Inflation increases →P increases → Value of money decreases.

1. The Quantity Theory of Money:
a. Money supply and money demand
• Money supply (MS) in the real world: determined by
- Fed. [Trong làm bài mình giả sử chỉ có Fed control]
- The banking system.
- Consumers.

• Money demand (MD):

- How much people want to hold money (including Cash + Deposit)
- Depend on P: P increases →Value of money decreases → Quantity MD increases
(negatively with value of money, other things equal)
- People want to hold more money → MD decreases.

• Diagram:

The increase in money supply → the increase in price level → decrease in value of
money.
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

b. Nominal and Real variables

• Nominal variables: measured in monetary units (not adjusted for inflation)
• Real variables: measured in physical units (adjusted for inflation)
• A relative price:
𝑃
- The price of one good relative to another: 𝑃1
2

E.g: Relative price: 𝑃𝑐𝑎𝑟 = 20mil/unit, 𝑃𝑐𝑜𝑤 = 12𝑚𝑖𝑙/𝑢𝑛𝑖𝑡

𝑃𝑐𝑎𝑟 20
= 12 = 1.67 → The relative price of car to cow
𝑃𝑐𝑜𝑤

𝑃𝑐𝑜𝑤 12
= 20 = 0.6 → The relative price of cow to car
𝑃𝑐𝑎𝑟

• Real wage là một dạng đặc biệt của relative price.

𝑊𝑎𝑔𝑒 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑤𝑎𝑔𝑒 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑙𝑎𝑏𝑜𝑟
𝑅𝑒𝑎𝑙 𝑤𝑎𝑔𝑒 = = =
𝑃 𝑃𝑟𝑖𝑐𝑒 𝑙𝑒𝑣𝑒𝑙 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑎𝑛𝑑 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠

E.g: Nominal wage: 20 mil VND

𝑊𝑎𝑔𝑒 20𝑚𝑖𝑙
= = 400(𝑝ℎở)
𝑃𝑝ℎở 50,000
c. Classical Dichotomy
• Classical Dichotomy: the theory separates nominal & real variables.
In the long run: MS increase or decrease:
- Nominal variables increase or decrease.
- Real variables do not change.
• Monetary neutrality: the proposition that changes in MS do not affect real variables
(relative price and others …)
E.g:
+ Initial condition:
Pice-cream = $2
Pcake = $4
→Relative Pice-cream/cake = 2/4=0.5
+ Nominal prices double
Pice-cream= $4
Pcake= $8
→Relative Pice-cream/cake=4/8=0.5

• Velocity of Money: The rate at which money change hand.

Y = Real GDP → unchanged
P = Price level
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

Nominal GDP = P × Y

V= Velocity → unchanged
M = Money supply (increase) → increase inflation, nominal GDP, and P
- Velocity formula: V x M = P x Y
- Real GDP constancy: Inflation rate = money growth rate.
- Real GDP increase: Inflation rate < money growth rate.
2. Hyperinflation: When inflation > 50%/ month → hyperinflation
- The inflation tax: When government print money to pay for it spending.
o Inflation tax not the actual legal tax pays for govt
o If people hold securities, real estate or other assets it not affected
o If people hold money → reduce the value of money
- The fisher effect: An increase in the rate of money growth raises the rate of inflation
but does not affect any real variable.
Nominal interest rate = Real interest rate + Inflation rate
In the long run, money is neutral: Inflation increases → nominal interest rate
increase → real interest rate is unchanged.
E.g: Deposit ngân hàng 7%/năm, lạm phát 5%. Thực tế thu được 2% tiền lãi.
- The cost of inflation:
• Inflation fallacy: People fell poor because of inflation (in short run).However, in long
run it equal to real variable.
• Shoe leather cost: People keep less cash, so they deposit into bank (opportunity
cost, transaction, time to go to bank and withdraw)
• Menu cost: The cost for change the menu when price increase
• Misallocation of resources from relative-prices variability: Price don’t change in 1
time
• Confusion & inconvenience
• Tax distortions: Tax just base on nominal income not on the real variable → Pay
more tax
Special cost of unexpected inflation:
Nominal interest rate = Real interest rate + Inflation rate
7% = 1%+ 6% (Normal)
7% = 3% + 4% (Người cho vay được lợi)
7%=-3% +10% (Người mượn được lợi)
Nguyễn Thái Thanh – Introduction to Macro Economics – Final
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

OPEN – ECONOMY MACROECONOMICS BASIC CONCEPTS

Closed economy: not interact with other economy.

Open economy: interact freely with other economy.

1. The International Flows of Goods and Capital

- Net export: Net export = Export – Import (NX = X – M)

Factors influence NX, X, M:

- Consumers’ preferences

- Prices of goods.

- Exchange rates (VND/USD)

Ban đầu E = 20,000VND/USD.

1 tấn gạo VN bán = 20mil =1000USD

Sau đó E đổi = 30,000VND/USD

1 tấn gạo = 20mil = 667USD

→ Gạo VN relatively cheaper → Export gạo của VN tăng

- Income of consumer

- Transportation costs.

- Government policies.

- Trade surplus: NX > 0 → X > M.

- Trade deficit: NX < 0 → X < M.
- Balanced trade: NX = 0 → X = M.
- Net capital outflow (Net foreign investment)

NCO = (domestic buy foreign) – (foreign buy domestic)

= (Money → foreign) – (Money → domestic)

= Cash Outflow – Cash Inflow

NCO > 0: Capital outflow

NCO < 0: Capital inflow

 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

- 2 types of investment

• Foreign direct investment: Domestic residents actively manage the foreign

investment
E.g: McDonalds opens a fast – food outlet in Moscow
• Foreign portfolio investment: Domestic residents purchase foreign stocks or bonds
supplying “loanable funds” to a foreign firm.
- An accounting identity: NCO = NX

NCO = NX = S - I

Y = C+ I + G + NX

Y - C - G = I + NX

In which, Y – C - G = S = Total saving of a country

S - I= NX
S - I= NCO

• Trade surplus: X > M

NX > 0

Y > Domestic spending (C+I+G)

S>I

NCO > 0

• Trade deficit: X < M

NX < 0

Y < Domestic spending (C+I+G)

S<I

NCO < 0

2. The Prices for International Transactions: Real and Nominal Exchange Rates.

- Nominal exchange rate: $1 = VND 23,060.

- Appreciation (strengthening): Increase the value of the currency.

 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

E.g: Increase the value of money, $1 = 20,000VND. The value of VND increases, and
we only need 20k VND to buy $1

→VND appreciates against USD.

- Depreciation (weakening): Decrease the value of the currency.

E.g: Decrease the value of money, $1 =20,000VND. We buy less VND compared to the
former case.

→USD depreciates against VND.

- The real exchange rate:

𝑒×𝑃
𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 =
𝑃∗
P = domestic price

P*= foreign price (in foreign currency)

e = nominal exchange rate.

E.g:

Nominal exchange rate 0.5 Euro/$1.

Price of chicken in $ = 2$/kg

Price of chicken in euro = 1.5euro/kg

0.5 × $2 2
𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 = = = 0.67 𝑒𝑢𝑟𝑜/$
£1.5 3

- Nếu Depreciate: US Dollars đang mất giá hơn bình thường so với VND → hàng
US sẽ rẻ hơn → Export nhiều hơn qua VN → Depreciate benefits Export.

- Nếu Appreciate: US Dollar đang có giá hơn → Hàng US sẽ tự động đắt hơn → Export
giảm → Hàng VN rẻ hơn vì VND depreciate → Import hàng VN → Import tăng →
Apppreciate benefits Import.

- Law of one price: A good should sell for the same price in all markets.

- Arbitrage: Take advantage of price differences for the same item in different markets.

E.g: Tea in VN: $3/kg, tea in US: $4/kg.

Arbitrage (Không tính các chi phí vận chuyển): Quick profit: buy tea in VN and sell it in
US → P increase & P decrease → equal.
VN US

- Purchasing – power parity: a unit of any given currency should be able to buy the
same quantity of goods in all countries.
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

𝑒 × 𝑃 = 𝑃∗

𝑃∗
𝑒=
𝑃
P* increases → e increases → the value money of domestic increase →
appreciation.

P* decreases → e decreases → the value money of domestic

decrease → depreciation.

- Limitations:

• Many goods are not easily traded (Price differences on such goods cannot
be arbitraged away)

• Even tradable goods are not always perfect substitutes (Price differences reflect taste
differences.)
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

A MACROECONOMIC THEORY OF THE OPEN ECONOMY

I. Supply and Demand for Loanable Funds and for Foreign-Currency Exchange
1. The Market for Loanable Funds (Tḥi trường cho vay)
- The supply of loanable funds comes from national saving.
- The demand for loanable funds comes from domestic investment and net capital
outflow (can be positive or negative)
o NCO > 0: net outflow of capital
o NCO < 0: net inflow of capital
- The quantity of loanable funds demanded and the quantity of loanable funds supplied
depend on the real interest rate.
o R increases → Save more → Supply increases
o R increases → Borrowing costs more → Discourage Investment → Demand decreases
o R increases -> NCO decreases (người dân không mua tài sản nước ngoài nữa và
người nước ngoài mua tài sản trong nước)
- The interest rate adjusts to bring the supply and demand for loanable funds into
balance.
- At the equilibrium interest rate, the amount that people want to save is exactly equal
to the desired quantities of domestic investment and net capital outflow.
2. The Market for Foreign-Currency Exchange (Tḥi trường quy đổi tiền tệ)
- Net capital outflow = Quantity of dollars supplied for the purpose of buying assets
abroad.
- Net exports = Quantity of dollars demanded for the purpose of buying U.S. net exports
of goods and services.
- The real exchange rate = the price that balances the supply and demand in the market
for foreign-currency exchange.
• When real exchange rate appreciates, goods become more expensive relative to
foreign goods, lowering exports and raising imports: e increases → Demand
decreases

Interest rate

Supply (saving)

re

Demand (I+NCO)

Quantity of loanable funds

• The key determinant of net capital outflow is the real interest rate. Thus, as the real
exchange rate changes, there will be no change in net capital outflow (vertical axis).

Real exchange rate

 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

Supply (NCO)

real e*

Demand (NX)

Quantity of Dollars

- The real exchange rate adjusts to balance the supply and demand for dollars.
- At the equilibrium real exchange rate, the demand for dollars to buy net exports
exactly balances the supply of dollars to be exchanged into foreign currency to buy
assets abroad.
II. Equilibrium in the Open Economy
1. Net Capital Outflow: The Link between the Two Markets
Net capital outflow is determined by the real interest rate. When the real interest rate is
high, owning domestic assets is more attractive and thus, net capital outflow is low.
2. Simultaneous Equilibrium in two markets
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

Loanable funds Net capital outflow

r r
S

r r

D
NCO
LF NCO

E
S = NCO

D1

Dollars

Market for foreign-currency exchange

1. The real interest rate is determined in the market for loanable funds.
2. This real interest rate determines the level of net capital outflow.
3. In the market for foreign-currency exchange, net exports are the source of the
demand for dollars and net capital outflow is the source of the supply of dollars.
III. How Policies and Events Affect an Open Economy A. Government Budget
Deficits
A. Government Budget Deficit
1. A government budget deficit occurs when the government spending exceeds
government revenue → domestic investment and net capital outflow → fewer dollars in
the market for foreign currency exchange → real exchange rate rises hàng hoá nước
ngoài → Lower the supply of loanable funds → real interest rate rises → decline in both
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

B. Tax incentives (Giảm thuế đầu tư, kinh doanh)

When we have tax incentive → Demand Loanable fund increase → R increase → NCO
decrease → NX decrease → E increase
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

C. Trade policy (a government policy that directly influences the quantity of goods and
services that a country imports or exports).
- Tariffs (taxes on imported goods) and quotas (limits on the quantity of imported goods).
- Note that the quota will have no effect on the market for loanable funds. Thus, the real
interest rate will be unaffected.
- The quota will lower imports and thus increase net exports -> the demand for dollars will
increase → real exchange rate will rise → Exports will fall, imports will rise, and net
exports will fall.
- In the end, the quota reduces both imports and exports but net exports remain the
same.
Nguyễn Thái Thanh – Introduction to Macro Economics – Final

D. Political Instability and Capital Flight: a large and sudden reduction in the
demand for assets located in a country (Các công ty nước ngoài giảm việc mua tài
sản trong nước đáng kể vì vấn đề chinh trị, bất ổn kinh tế)
NCO rises → the demand for loanable funds rises → interest rate increases
NCO rises → the supply for exchange market increases → the equilibrium real
exchange rate decreases → NX increases
Nguyễn Thái Thanh – Introduction to Macro Economics – Final

Loanable funds Net capital outflow

r r
S

r2 r2

r1 r1
D1
NCO2

D2 NCO1
LF NCO

S1 = NCO1
E

S2 = NCO2

E1

E2

D1
Dollars

Market for foreign-currency exchange

 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

AGGREGATE DEMAND AND AGGREGATE SUPPLY

- Recession: a period of declining real incomes and rising unemployment
- Depression: a severe recession
- Short-Run Economic Fluctuations: Real GDP fluctuate (business cycle) but in long run it
remains unchanged
- Classical Economics
1. The classical dichotomy is the separation of variables into real variables and nominal
variables.
2. According to classical theory, changes in the money supply only affect nominal
variables.
I. The Aggregate-Demand Curve
A. Why the Aggregate-Demand Curve Slopes Downward?
Y = C + I + G + NX (4 factors make up the Demand)
• NOTE: Government purchases are assumed to be fixed by policy.
1. The Wealth Effect
- A decrease in the price level raises the real value of money and makes consumers feel
wealthier, which in turn encourages them to spend more.
- The increase in consumer spending means a larger quantity of goods and services
demanded.
2. The Interest-Rate Effect
- Lower price level reduces the interest rate, encourages greater spending on investment
goods, and therefore increases the quantity of goods and services demanded.
3. The Exchange-Rate Effect
Therefore, when a fall in the U.S. price level causes U.S. interest rates to fall, the real
exchange rate depreciates, and U.S. net exports rise, thereby increasing the quantity of
goods and services demanded.

B. Why the Aggregate-Demand curve might shift?

1. Change in C
• Stock market boom/ crash (thị trường chứng khoán tăng mạnh hay xuống đáy)
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

• Preferences: consumption/ saving tradeoff (mua sắm nhiều hay tiết kiệm)
• Tax hiker/ cut: Tăng/ giảm thuế
2. Change in I
• Firm buy new equipment: đầu tư trang thiết bị
• Expectation optimism/ pessimism kì vọng tốt/ xấu về thị trường
• Interest rate, monetary policy: lãi suất, chính sách tài khoán
• Investment tax credit or other tax incentive: tăng giảm thuế
3. Change in G
• Federal spending Chi tiêu chính phủ
• State spending
4. Change in NX
• Boom/recession in countries buy our export: phụ thuộc vào nước tiêu thụ
• Appreciation/ depreciation: Tăng/ giảm exchange rate
II. The Aggregate-Supply Curve
A. Why the Aggregate-Supply Curve Is Vertical in the Long Run?
- In the long run, an economy’s production of goods and services depends on its supplies
of resources along with the available production technology.
- Because the price level does not affect these determinants of output in the long run,
the long-run aggregate-supply curve is vertical

Long run aggregate supply

• LRAS include Labor (L), Human resource (H), Nature resources (N), Capital (K),
Technology (A)
• YN: Full employment, potential output
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

Short run aggregate supply

B. Why the Long-Run Aggregate-Supply Curve Might Shift?
Natural rate of output: the production of goods and services that an economy
achieves in the long run when employment is at its natural level.
a. Changes in Labor: Increases in immigration increase the number of workers available
→ LRAS shifts to the right.
b. Changes in Capital: An increase in the economy’s capital stock raises productivity
→ LRAS shifts to the right.
c. Changes in Natural Resources: A discovery of a new mineral deposit, a change in
weather patterns, a change in the availability of imported resources (such as oil) can
also affect long-run aggregate supply.
d. Changes in Technological Knowledge: The invention of the computer, opening up
international
C. Using Aggregate Demand and Aggregate Supply to Depict Long-Run Growth and
Inflation
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

- Two important forces that govern the economy in the long run are technological
progress and monetary policy.
1. Technological progress shifts long-run aggregate supply to the right.
2. The Fed increases the money supply over time, which raises aggregate demand.
- The result is growth in output and continuing inflation (increases in the price level).
D. Why the Aggregate-Supply Curve Slopes Upward in the Short Run?
1. The Sticky-Wage Theory (slow to adjust)
- Nominal wages are often slow to adjust to changing economic conditions due to long-
term contracts between workers and firms along with social norms and notions of
fairness that influence wage setting and are slow to change over time.
E.g: Suppose a firm has agreed in advance to pay workers an hourly wage of $20
based on the expectation that the price level will be 100. If the price level is actually 95,
the firm receives 5% less for its output than it expected and its labor costs are fixed at
$20 per hour.
- Production is now less profitable, so the firm hires fewer workers and reduces the
quantity of output supplied.
- Nominal wages are based on expected prices and do not adjust immediately when the
actual price level differs from what is expected. This makes the short-run aggregate-
supply curve upward sloping.
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

P: price (giá thực)

PE: Expected price (Giá kì vọng)
E.g: PE là giá lương kì vọng trong 3 năm
Khi giá cả thị trường tăng → P tăng nhưng PE không thay đổi → P > PE
Khi đó nhà sản xuất thấy có lời khi thuê được nhân công giá rẻ → sản xuất tăng →
Real GDP tăng
2. Menu cost
P > PE → In lại menu
• Nếu như cửa hàng đó không có menu → tăng giá sản phẩm
• Nếu cửa hàng có menu, và giá trong menu thấp hơn giá thực → Nhiều người mua hơn
→ Real GDP tăng
3. The Misperception theory
Khi giá 1 sản phẩm nào đó tăng → nhà sản xuất lầm tưởng sản phẩm của mình sẽ tăng
giá → sản xuất nhiều hơn → Real GDP tăng
➔ Conclusion: the 3 theories → Short run aggregate supply slope up-ward
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

E. Why the Short-Run Aggregate-Supply Curve Might Shift?

1. Events that shift the long-run aggregate-supply curve will shift the short-run aggregate-
supply curve as well.
2. However, expectations of the price level will affect the position of the short-run
aggregate-supply curve even though it has no effect on the long-run aggregate- supply
curve.
3. A higher expected price level decreases the quantity of goods and services supplied
and shifts the short-run aggregate-supply curve to the left. A lower expected price level
increases the quantity of goods and services supplied and shifts the short-run
aggregate- supply curve to the right.
F. Fluctuations in Economics - SRAS might shift in the following 3 cases:
1. The effect of a shift in Aggregate Demand Stock market crash

C decrease → AD shift left

Overtime PE decrease → SRAS shift right → C reach YN: In the long run, the
economy will move back to the natural rate of output.
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

- People will correct the misperceptions, sticky wages, and sticky prices that cause the
aggregate-supply curve to be upward sloping in the short run.
- The expected price level will fall, shifting the short-run aggregate-supply curve to the
right.
2. The Effects of a Shift in Aggregate Supply
Stagflation: a period of falling output and rising prices.
Example: Firms experience a sudden increase in their costs of production.
- This will cause the short-run aggregate-supply curve to shift to the left. (Depending on
the event, long-run aggregate supply may also shift. We will assume that it does not.)
- In the short run, output will fall and the price level will rise. The economy is experiencing
stagflation.
E.g, Giá dầu tăng → Cost of production tăng → SRAS giảm và đẩy giá cao hơn →
Inflation cao hơn

If policymakers want to end the stagflation, they can shift the aggregate-demand curve.
Note that they cannot simultaneously offset the drop in output and the rise in the price
level. If they increase aggregate demand, the recession will end, but the price level will
be permanently higher.
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

MONETARY AND FISCAL POLICY

The most important reason for the downward-sloping aggregate-demand curve is the
interest-rate effect.
Theory of liquidity preference: Keynes’s theory that the interest rate adjusts to bring
money supply and money demand into balance.
I. The Downward Slope of the Aggregate-Demand Curve
- Price increases → Money Demand increases → Interest rate increases (cost of
borrowing is higher) → Consume less → Aggregate demand falls

- Changes in money supply: Fed buys bonds → Money Supply increases → Interest rate
decreases → Consume more → Aggregate demand rises

II. How Fiscal policy influences Aggregate Demand

Fiscal policy: the setting of the level of government spending and taxation by
government policymakers.
A. Government Purchases

1. When the government changes the level of its purchases, it influences aggregate
demand directly. An increase in government purchases shifts the aggregate- demand
curve to the right, while a decrease in government purchases shifts the aggregate-
demand curve to the left.
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

2. There are two macroeconomic effects that cause the size of the shift in the aggregate-
demand curve to be different from the change in the level of government purchases.
They are called the multiplier effect and the crowding- out effect.
B. Multiplier Effect: the additional shifts in aggregate demand that result
when expansionary fiscal policy increases income and thereby increases
consumer spending (consumers mua càng nhiều thì income của sellers càng
nhiều → mua nhiều hàng hoá hơn)
1
Multiplier =
(1-MPC)
MPC: Marginal propensity to consume (% tiền sẽ dung)
E.g, $100: dùng $80, giữ $20 → MPC=0.8
1
∆Y = × ∆G
1 - MPC

C. Crowding-out Effect: the offset in aggregate demand that results when expansionary
fiscal policy raises the interest rate and thereby reduces investment spending.
1. When the government buys a product from a company, the immediate impact of the
purchase is to raise profits and employment at that firm. As a result, owners and
workers at this firm will see an increase in income, and will therefore likely increase their
own consumption.
2. If consumers want to purchase more goods and services, they will need to increase
their holdings of money. This shifts the demand for money to the right, pushing up the
interest rate.
 Nguyễn Thái Thanh – Introduction to Macro Economics – Final

When the government increases its purchases by $X, the aggregate demand for
goods and services could rise by more or less than $X, depending on whether the
multiplier effect or the crowding-out effect is larger.
- If the multiplier effect is greater than the crowding-out effect, aggregate demand will rise
by more than $X.
- If the multiplier effect is less than the crowding-out effect, aggregate demand will rise by
less than $X.
Change in taxes
Tax decreases → Spend more, C increase → AD increase → Shift AD to right
Fiscal policy & AS: Fiscal policy also effect to AS
• Cut tax: Y increase → AS increase
• Government spending: G increase → build road, invest in education → more effective
(long run) → Y increase → AS increase
Nguyễn Thái Thanh – Introduction to Macro Economics – Final

SHORT-RUN TRADE-OFF BETWEEN INFLATION AND UNEMPLOYMENT

Phillips curve: a curve that shows the short-run trade-off between inflation and
unemployment.
Demand càng cao → Thất nghiệp càng thấp thì mua càng nhiều → price tăng → lạm
phát tăng và ngược lại.

I. Aggregate Demand, Aggregate Supply, and the Phillips Curve

The greater the aggregate demand for goods and services, the greater the economy’s
output and the higher the price level. Greater output means lower unemployment.
Whatever the previous year’s price level happens to be, the higher the price level in the
current year, the higher the rate of inflation.

Monetary and fiscal policies can affect Philips Curve by changes in Aggregate Demand

II. Long-run Phillips Curve

- In the long run, monetary growth has no real effects, LRAS is vertical. Thus,
increases in aggregate demand lead only to changes in the price level and have
no effect on the economy’s level of output. Thus, in the long run, unemployment
will not change when aggregate demand changes, but inflation will.
Nguyễn Thái Thanh – Introduction to Macro Economics – Final

- The long-run aggregate-supply curve occurs at the economy’s natural rate of output.
This means that the long-run Phillips curve occurs at the natural rate of
unemployment.

References: TA Dr.Trung
Nguyễn Thái Thanh – Introduction to Macro Economics – Final